AUTOMOBILE EXPENSES

Most small businesses have auto expenses. An accountant may deduct auto expenses either at actual costs or on a mileage basis. This decision must be made the first year the car is in use. If you use the actual costs method, then you may only deductthat portion of your expenses that are related to business. That portion is determined by mileage.

So, how do you account for this? Moreover, what if you have more than one car or truck and some are on one method and some on the other?

Mileage

For cars on the mileage method, all costs for car payments, gas, and service should be paid out of the owner’s personal account. The company may pay the costs, especially if the car has been designated as a company car.

Each month the driver’s log should be consulted. If the owner has paid the actual costs out of his own pocket, then write him a check for the costs. The credit then goes to cash. If the company has paid the actual costs for the car, then debit those costs to a special auto account in the Equity Section. (Those costs do not go to the Income Statement because they are not deductible.) The credit for each month’s entry for autos on the mileage method then goes here. Hence, the ending amount in the Equity Section account will be the difference between actual costs and mileage method costs. The auto expense account will exactly match the deductible amount on the tax return.

Actual Costs

Believe it or not, you must still consult the driver’s log each month for vehicles on the Actual Cost method. This is to determine business use or personal use. The % of personal use must be multiplied by the total costs paid by the company. Those costs must be credited to the expense account and debited elsewhere. But where?

Using the same logic as above, a special account in the Equity Section can be recommended. This account then is added to the owner’s draws.